Despite any news you have heard to the contrary, inequality globally has been decreasing over the last several decades (see the links at the bottom of this post for more on this point). Largely though, the reduction in global inequality has been driven by the remarkable growth in incomes in China and India, especially in China. That has, paradoxically, led to an increase in inequality within China, at the same time that inequality globally has been reducing (for more on this point, see here).
However, now it appears that China may be turning the corner. At least, that is the conclusion of this new article by Ravi Kanbur and Yue Wang (both Cornell University), and Xiaobo Zhang (Peking University), published in the Journal of Comparative Economics (ungated earlier version here). They use data from several waves of two household surveys (the Chinese Household Income Project (CHIP) and the China Family Panel Studies (CFPS)), covering the period from 1995 to 2018, and first demonstrate that:
...the time path of inequality, after increasing sharply before 2010, has hit a plateau. Inequality declined after 2010 till 2016, and despite the rebound in 2018 over the last decade it did not go much or at all above the peak of 2010.
In other words, after several decades of rising inequality over time, China has recently experienced a decrease in inequality. Kanbur et al. then dig into the sources of inequality, and find that the trends in inequality are driven by underlying trends in inequality in wage income. They also show that:
The long-term trend of regional consumption inequality shows that there are three peaks for the rural-urban between component, in 1995, 2000, and 2004. After the third peak, the rural-urban between component maintained a declining trend. The trend of regional income inequality since 2002 also shows the same pattern with the peak at 2005. Notice that both regional inequality and rural-urban between components as measured with income and consumption turned downward the mid-2000s.
In other words, the recent decline in country-level inequality in China arises from a decrease in inequality between rural and urban areas. Rural areas are 'catching up' with urban areas in terms of income, which might arise as rural-urban migration increases the supply of labour in urban areas, depressing wages there, while decreasing the supply of labour in rural areas, resulting in higher wages. In the development economics literature, this is referred to as the "Lewis turning point", after the 1979 Nobel Prize winner W. Arthur Lewis.
Kanbur et al. then go on to describe some of the policy changes that might have helped to depress rural-urban inequality, including:
...in 2004 the Ministry of Labor and Social Security issued a “Minimum Wage Regulations” law and the next decade saw rising minimum wage standards coupled with substantial improvements in compliance... Further, a number of social programs were introduced and strengthened from the 2000s onward. Since 2004, for example, China has introduced new rural cooperative medical insurance, currently covering more than 95 percent of the rural population. Rural social security has also been rolled out since 2009.
However, this is clearly not the last word on Chinese inequality. The data that Kanbur et al. use doesn't cover all provinces in China, and for a lot of their analysis (including the rural-urban differentials) they rely on province-level comparisons, which omits any consideration of inequality within provinces. Their results are also at odds with the predictions of other migration researchers, including Branko Milanovic, who predicted that by 2020 China would be contributing to an increase in global inequality. Of course, the slight uptick in inequality that Kanbur et al. note at the end of their time series might just be the start of that. It will be interesting to see how things progress from here.
Finally, and ironically, Kanbur argued in an earlier article (which I discussed in this post) that we should focus on global inequality, rather than inequality on a country-by-country basis. And yet, here he presents further research on country-level inequality (albeit a very important country in a global context, and in the context of global inequality in particular). Clearly there is more to come on this topic.
[HT: Marginal Revolution, last year]
Read more:
- Several research articles on inequality
- Chinese growth and global inequality
- More evidence of declining global inequality
- Changing global inequality, migration and open borders
- The last two centuries of global inequality
- Inequality was similar, or higher, in ancient times than it is today
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